Cotton has joined Hit Parade price party

Not since the Civil War era, says O. A. Cleveland, have the stars been so favorably aligned for cotton. And, the veteran cotton analyst contends, that long-dreamed-of $1 price is likely to be around for some time — perhaps as far out as 2014.

Not since the Civil War era, says O. A. Cleveland, have the stars been so favorably aligned for cotton.

And, the veteran cotton analyst contends, that long-dreamed-of $1 price is likely to be around for some time — perhaps as far out as 2014 — thanks to an almost empty pipeline and burgeoning demand, particularly in China.

“It’s not going back to 65 cents to 85 cents,” Cleveland, Mississippi State University economics professor emeritus, said at the winter commodity conference of the Mississippi Farm Bureau Federation. “I’ll carry it out to 2013-2014 pushing $1 per pound.

“My projection for cotton this year is for a range between $1.05 and $2,” he said. “Not a single one of you believe me — but then you never have” [much audience laughter].

Two dollars for old crop cotton isn’t likely, he acknowledged … but, a big question mark is China, which has exhausted its cotton reserves. “If that situation remains stable and we see a squeeze in certificated stocks, it’s not outside the realm of possibility.”

The cotton market has traded at the limit for 33 of the past 54 trading days [as of Jan. 20], he notes. “In my lifetime, I’ve never seen that. It’s absolutely unbelievable.”

Cotton is up 100 percent over the last six months, Cleveland says, and up 150 percent over the past 18 months. “Cotton is on the same price ride that we saw begin for grains back in 2006-2007 and which is continuing today.”

In fact, he says, the foundation for the red hot action in the commodities market in recent years can trace back to a monumental political decision by Russia four decades ago. “The current high prices for cotton are directly related to the Russian wheat export situation that occurred in the 1970s.” And, he says, it is reflected in similar political actions in recent years by China and India.

Russian political decision impact on markets

“All this began in 1970 when Russia leadership made a political decision to upgrade the diet of their people, to move them to a meat diet through livestock production. In 1972-73, Russia had the worst wheat crop failure ever. They needed wheat to feed livestock to keep the promise to their people.

“Four to five teams of Russians came to the U.S. and met over a weekend with the primary grain export merchants. Come Monday morning when the wheat market opened —wheat, which had been trading at about $2.50, was up the limit. Tuesday morning, it was up the limit again. News began to leak out that Russia had bought U.S. wheat. Wednesday morning, wheat was up the limit.

“In six months’ time, a $2.50 market was trading at $6. I remember one of my professors telling me, ‘Nobody’s ever going to grow corn again, nobody’s ever going to grow cotton again — everyone’s going to grow wheat.’”

But over the course of two years, Cleveland says, “Commodity prices settled and price ratios fell back into line. High prices had resulted in more wheat acres, and other commodities had lost acreage because of their low price relative to wheat.”

In 2000, he says, another political decision changed the world commodity picture.

“China’s leadership made a decision to upgrade the diet of their people, and they chose to do it through their pork industry. The next year, lo and behold, India’s leaders made a political decision to upgrade the diet of their people with poultry.

“So, we had all those feed animals needing grains, and by 2006-2007 we began to see high prices for all the grains. Wheat, corn, and soybeans were up 100 percent, then 150 percent, and they still are. Now, cotton has joined that Hit Parade price party.”

In 2002, Cleveland says, another political decision roiled the commodity markets — this time when the U.S. committed to major expansion of ethanol production with corn as the feedstock.

“There was an immediate major increase in corn price and corn production. Now, we had wheat, corn, soybeans all essentially competing for the same acre of ground.

Price ratios affected crop acreages

“Price ratios have to remain constant, or stable, if we’re going to have stable production or stable plantings. For the last four years, we’ve not seen a price ratio that favored cotton. So, U.S. producers got out of cotton; acreage dropped from 1.1 million. to 300,000. This year, we could be back to 525,000 to 550,000.”

Since 2006-07, Cleveland says, “We’ve finally got the supply of these major commodities somewhat in line with demand. — but while we’ve been doing this, for the most part we’ve used all our carryover stocks. At the end of the year, there’s nothing left, which puts tremendous pressure on markets to stay high in order to bring in acreage to make sure we’ll have enough of these crops.

“Today, because we’ve not planted cotton worldwide at the same levels we planted it prior to 2006, we’ve begun to draw down the world’s cotton supply. We’re going to have about 1.9 million bales carryover this year, which will be the lowest I’ve ever seen in my career. Some are saying it will be as low as 1.3 million bales. This points to much higher prices.”

In the last two years, he says, “We’ve consumed 21 million bales more than we’ve produced. We’ve taken cotton from a record carryover down to a very low carryover. Now, we’re in the same boat with the grains. There’s no corn carryover, there’s no soybean carryover, there’s a little bit of wheat carryover, but not much. Cotton doesn’t have carryover. Grains have been up 150 percent; now cotton is up 150 percent.

“Analysts are projecting a $4 to $8 price range for corn and $12 to $16 for soybeans. With all this grain demand, cotton has to fight to be grown.

“Will $1.05 grow more cotton? Yes. We’ll get more acreage this year. Will we get 2 million additional acres? I’d love to see it, but I don’t think it will happen. Even if we should, it still won’t lower my price forecast. If we don’t get it, my price forecast for 2012 is going to be even higher.

Commodity pipelines near empty

“Even though price ratios are basically back more in line, there are no supplies of these commodities around the world. There’s a lot of pressure on Mother Nature to allow us to produce bumper crops. But, the El Nino/La Nino situation is telling us to look for another dry season in Texas. They had a very wet season last year, had a wonderful crop. But, they don’t have subsoil moisture now, and they’ve never had a good crop without it.”

What China and India do in terms of its internal production and consumption of cotton and other crops will also be an influence on markets, Cleveland says.

“China is the world’s largest cotton producer, the world’s largest cotton consumer, the world’s largest textile industry. Next door, India is the world’s second largest cotton producer, consumer, and textile industry. Those two countries have the largest populations in the world.

“We’ve always said if we could just get each Chinese consumer to buy one more tee shirt, it would work wonders for cotton demand. Well, now they’re buying those tee shirts and a lot more cotton goods, and they’re now consuming 50 million bales or more per year.”

In the last 15 to 16 months, Cleveland says, China has used its cotton reserves. “They’ve taken their reserves down to zero. They may increase cotton acreage this year, but their consumption is growing as much or more.

“They not only are the world’s largest importer of cotton, they’re also the world’s largest importers of corn and soybeans, in keeping with their commitment to upgrade their people’s diets. When Russia made its commitment in the 1970s to upgrade diets, they were feeding 130 million people. China and India, in upgrading their diets, are feeding 2 billion people and they’re using a lot of corn, wheat, and soybeans to do it.”

In 2006, Cleveland says, Oil World, the magazine for edible oils, commented, “What we’re seeing now is that we’re on the brink of a world food crisis.”

“Everybody scoffed at that,” he says. ‘But, we had the lowest per capita carryover of oilseeds that we’d ever had in the world. At the same time, there was wheat crop failure in Australia, rapeseed crop failure in Europe, and with weather problems in the U.S. we saw our cotton carryover become extremely low and higher prices for commodities.

Concern for crop failures

“Crop failures happen all the time. One of the best examples for cotton was in Dawson County, Texas in 1973 or ’74. They had the largest cotton production of any county in the U.S., one year, and the following year not a single gin operated in that county because of weather problems with the crop.

“When people talk about potential for a food crisis, that’s very difficult for Americans to understand. But the market does grasp it.”

The U.S. “has been the big horse pulling the economic engine of the world for years,” Cleveland says, “and we still are. But, for the past four years we’ve seen the developing countries become the big horse pulling the world economic engine.

“China went for nearly 10 consecutive years with a growth rate above 10 percent annually. For the last two years, the U.S growth rate has been only about 1 percent. Now, China is dealing with a tremendous inflation problem; the central bank has raised interest rates five times in the last seven months.

“In the short run, the next year or two, inflation in China can be very good for U.S. exports of food grains, feed grains, and cotton.”